Detroit Will Be Run by Financial Manager

By

Matthew Dolan

Updated March 1, 2013 6:54 p.m. ET

DETROIT—The state of Michigan is taking on one of the most difficult turnaround projects ever attempted: a rescue of a sprawling city with $14 billion in debt, a depleted tax base, a legacy of government corruption—and very little time left to avert financial collapse.

Republican Gov. Rick Snyder said Friday he plans to appoint an emergency financial manager for Detroit, taking control of the state's largest city out of the hands of elected leaders. The governor, who has called a revitalization of Detroit critical to sustaining the state's nascent economic recovery, said he didn't believe city leaders were addressing rapidly enough Detroit's ballooning deficits and a persistent cash drought.

At an invitation-only town hall at Wayne State University, Mr. Snyder called it a "sad day" that he "wished had never happened." But he said that the emergency manager would also bring Detroit new promise. "It's time to say that we should be moving forward," he said.

City and state Democratic leaders opposed the governor's move. "I am deeply disappointed by today's hostile takeover of Detroit. We need to trust the democratic process, not throw it out," said Lon Johnson, chairman of the Michigan Democratic Party, in a statement on Friday.

The governor's decision represents a turning point for a city that was once the industrial capital of America and an engine of its growth. Six decades ago, Detroit was a city of nearly two million people brimming with factory jobs that offered immigrants from the South and abroad a pathway into the American middle class.

Today, it is a city of just over 700,000 residents, confronting widespread poverty, blight and diminished municipal services. With an annual deficit of $327 million, the city is on course to run out cash by June.

A much larger city, New York, had a financial control board imposed in the 1970s during a fiscal crisis. But the state takeover of Detroit would be more sweeping, akin to the control board over Washington, D.C., in the 1990s, said Bruce Katz, director of Metropolitan Policy Program at the Brookings Institution.

The takeover could have broad implications for the principle of local rule in troubled cities and widen racial tensions that have long been an undercurrent of relations between Michigan's cities and Lansing, the state capital. With a state takeover of Detroit, nearly half of the state's African-American population will live in a city under state control.

During the Wayne State announcement, Mr. Snyder said that he has a top candidate to fill the post of emergency financial manager, but he declined to say who that person was.

The manager will have sweeping power to set the financial direction of the city. The appointee will also have the ability to break municipal labor contracts starting later this month when a new state law takes effect. Elected leaders in Detroit could lose their jobs, but the emergency manager could also retain some of them by setting new salaries and modifying duties.

If the turnaround effort fails, Detroit could be forced into the nation's largest municipal bankruptcy, a filing that could have ripple effects on the creditworthiness of the state and beyond.

City leaders, including the mayor and City Council, had opposed an emergency manager, saying they could fix the city themselves, given more time and more resources from the state. It was unclear whether they would appeal the governor's determination over the next 10 days or fight the appointment in court, and the mayor offered an olive branch Friday.

"If, in fact, the appointment of an emergency financial manager both stabilizes the city fiscally and supports our restructuring initiatives which improve the quality of life for our citizens, then I think there is a way for us to work together," Mayor Dave Bing said in a statement.

Detroit would pose a stiff test for Michigan's emergency-manager system, a controversial tool for municipal overhaul that hasn't had many successes yet. Today, there are five cities and three public-school districts in Michigan under the control of emergency managers, and none has emerged from state control during Mr. Snyder's two-year-plus tenure.

The move also presents a political challenge for Gov. Snyder, a former accountant and technology executive who helped the state dig out of a fiscal mess shortly after taking office in 2011. His popularity suffered late last year after he signed right-to-work legislation that weakened organized labor in the home of the United Auto Workers union. With the takeover of Detroit, and new legislation taking effect later this month, the state gains more power to tear up municipal union contracts in an effort to cut costs.

Many city residents, after years of budget cutbacks and weak municipal services, said they were resigned to their fate under state control. Still, Rev. Jim Holley of the city's Historic Little Rock Missionary Baptist Church said he didn't expect the emergency manager to be in power for a long time. "It's a temporary setback," he said.

Mr. Snyder said he expects the emergency manager to stay in place for at least 18 months.

But others, such as Denise Beauregard, a 53-year-old event planner from the city's Rosedale Park neighborhood, said she was so dismayed by the prospect of an emergency manager that she would put her tax payments into escrow until the manager leaves the city.

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